The policy board, led by bank President Rodrigo Vergara,
held the key rate at 5 percent, as forecast by all 19 analysts
surveyed by Bloomberg. Policy makers last changed borrowing
costs in January, surprising economists with a quarter-point
reduction.

The central bank is facing threats on two fronts as China’s
deceleration and Europe’s debt crisis threaten to damp demand
for Chilean exports while internal growth is putting pressure on
inflation. Policy makers yesterday maintained their neutral
bias, giving no indication they will either raise rates to
contain prices or cut them to sustain growth, Bice Inversiones’
Sebastian Senzacqua said.

“The probability of a cut obviously would increase if we
saw something happen abroad that increases tensions and can be
passed on to the local economy,” Senzacqua, an investment
analyst at the financial services company, said yesterday by
phone from Santiago. “Given that the economy is growing at
trend, there is increasingly less need to raise the rate.”

Traders and investors polled every two weeks by the central
bank forecast on Aug. 22 a quarter-point cut in the key rate by
March, before ruling out monetary easing for the next two years
in a Sept. 12 survey. In the two weeks between the two surveys,
the government and central bank raised economic growth estimates
for 2012 while inflation accelerated.

Growth Forecasts

Policy makers in their September monetary policy report
increased their growth forecast for this year to a range of 4.75
percent to 5.25 percent from their June estimate of 4 percent to
5 percent.

Finance Minister Felipe Larrain said in a Sept. 11
interview in London that growth would be closer to 5 percent
than the government’s official estimate of 4.7 percent. The
economy continues to create jobs, he said, citing a decline in
the unemployment rate to 6.5 percent in the three months through
July from 7.5 percent last year.

At an estimated 4.9 percent increase this year, Chile’s
economic performance will surpass the Latin American average of
3.7 percent growth, according to forecasts by the United
Nations’ economic unit for the region in June.

“Domestically, output and demand indicators have evolved
around trend,” the central bank said in a statement
accompanying yesterday’s decision. “Although employment growth
has moderated further and no acceleration of labor costs is
observed, the labor market remains tight.”

Inflation Pressures

Consumer prices in the Andean nation rose 0.2 percent last
month, compared with the 0.3 percent median estimate of analysts
surveyed by Bloomberg. Prices remained unchanged in July and
fell 0.3 percent in June, the National Statistics Institute said
in a Sept. 7 report.

Annual inflation accelerated to 2.6 percent in August from
2.5 percent in July, while a “roughly” 5 percent annual
increase in the price of services points to mid-term risks of
inflationary pressures, Vergara said Sept. 7.

Two-year breakeven inflation, which is derived from the
difference between nominal and inflation-linked yields on swaps,
rose eight basis points, or 0.08 percentage point, to 2.99
percent yesterday from Aug. 16 when the bank made its previous
rate decision. Policy makers target 3 percent annual inflation,
plus or minus 1 percentage point over 24 months.

“In the short term, inflation could be greater because of
the recent increase in the price of oil and food abroad,”
Vergara said. “Sustained or increased vigor in activity and
internal demand could continue putting pressure on capacity gaps
and cause inflationary pressures.”

‘Flexibility to Wait’

Still, Chile has the lowest inflation of any major Latin
American economy tracked by Bloomberg, followed by a 3.11
percent rate in Colombia and 3.53 percent in Peru. At the same
time, Chile has the highest borrowing costs of any rate-setting
central bank in the region behind Brazil, which has cut rates
for nine straight meetings.

Colombia also has eased monetary policy, reducing rates
below those in Chile as a slowdown in inflation provides space
to stimulate growth. Policy makers in Chile have indicated they
may not follow suit.

“The working supposition is that the monetary policy rate
will remain at current levels in the short term,” Vergara said
Sept. 7. “The monetary policy rate is within ranges considered
to be neutral, which provides flexibility to wait.”